Could the economy become subprime?
A foreclosure sign hangs in front of a home in Miami.
KAI RYSSDAL: As we alluded to up at the top of the program, another day today, another development in the subprime mortgage meltdown. The New York Stock Exchange suspended trading in New Century Financial today.That's the lender in the most trouble. Meanwhile the Mortgage Bankers Association said today foreclosures shot up in the fourth-quarter of last year. In large part because of those subprime borrowers.
Marketplace's Tess Vigeland is here to explain why all that matters for the larger housing market and the whole economy, too. Hi Tess.
TESS VIGELAND: Hey Kai.
RYSSDAL: Speaking of explanations, let's go over one more time exactly what the subprime market is.
VIGELAND: Good idea. The subprime mortgage market is made up of borrowers who have had bad credit, little credit or have no credit history at all. That means that any lender — like New Century — is taking on a huge amount of risk by giving them money to buy a home. Now in addition to the borrower being risky, some of these borrowers are getting risky mortgages. For example, they'd get a teaser rate with a super-low introductory interest rate for one or two years. And then after that, the interest rate skyrockets and the borrower's simply unable to pay. And that's what we mean by the subprime market.
RYSSDAL: OK, so these people who are lending the money to these people with these subprime mortgages are now on the hook.
VIGELAND: In part they are. But Wall Street bought up a lot of these subprime mortgages as securities. So investors are also on the hook. Wall Street has been trying to force the original lenders to take back some of those securities, but of course a lot of them are already in trouble — again like New Century — so there's really nobody else to hold the bag, so to speak.
RYSSDAL: All right, so talk to me for a second about what this means for the housing market writ large. What does it mean for the . . . I guess it's called the prime mortgage market right?
VIGELAND: Yeah. For the prime mortgage borrower, it certainly could become a problem, because lenders overall are tightening up on the credit that they hand out. So say you're a prime borrower, you have pretty good credit. You got an adjustable rate mortgage three years ago or five years ago that's set to re-adjust to a higher rate. So you were hoping to re-fi. Well a lot of these banks and other lenders have tightened up on the credit, so you may find it's really hard to refinance. And you could be paying for the sins, then, of the subprime market. And certainly if you're a subprime borrower, it's gonna get harder and harder to buy a home.
RYSSDAL: Let me make sure I understand: there is less money out there to go into the real estate market.
VIGELAND: Well, that, and they're putting more restrictions on what kind of people they will loan to.
RYSSDAL: OK. Now we have talked on this program many times how the housing market is in trouble, how we don't know where the bottom is. What does this mean for the larger economy if the housing market is yet deeper in trouble?
VIGELAND: Well, as it gets harder to finance a house — if it does, and we're starting to see that it does — that means that there aren't as many buyers. So demand for homes goes down, supply goes up. We already have lots of houses on the market because of the slump that we've been in. So you're just adding to the inventory that's already available. And the more inventory that's out there, the greater the possibility the prices will go down. Prices go down, people can't sell at the price they wanted to or thought they could, buyers dry up because they can't get credit . . . and the slump just gets worse.
RYSSDAL: Any sign that this is gonna happen tomorrow? Or is it gonna take a little while?
VIGELAND: No, it'll take a little while to see whether this subprime problem infects the larger housing market and whether it infects the prime market. But it certainly is something that a lot of economists are watching very, very closely.
RYSSDAL: As are we. Marketplace's Tess Vigeland. Thank you, Tess.
VIGELAND: Thanks Kai.